How much should my e-book cost?

Amazon.com and SmashWords have opened the doors for self-publishing authors to distribute their e-books worldwide, and many authors are quick to take advantage of this opportunity. They upload their book files, fill in the book descriptions and other information, and then get to the question of price. How much should an e-book cost?

Many new self-publishing authors are looking for the most readers possible, so they choose a low price. Perhaps the author is hoping consumers will buy the book on impulse because the price is so low. Perhaps the author thinks that the low price will result in massive sales volume, which would compensate for the lower profit per book. I see many books with a $0.99 price tag.

This isn’t always the best approach to setting the price for an e-book. In fact, it’s usually the wrong approach. We can turn to the field of micro-economics to understand why gaining more readers isn’t always desirable, and why high sales volume doesn’t always produce the most profit. We’ll look at sales price from the basis of two concepts:

1. A $0.99 book doesn't cost $0.99
2. More buyers doesn’t mean more profit

1. A $0.99 book doesn't cost $0.99

I want to buy a book that has a sales price of $0.99. Great. Now I have to log-in to Amazon (or wherever), take the time to add the book to my shopping cart and enter my credit card information, trust that my information is safe, download the book, and pull it up in my e-reader, hoping it downloaded correctly. All those steps and emotions have value, too. I have to work to get that book, and that’s part of the full cost for the book. Ninety-nine cents may not have much value to me, but the time and effort do.

Before I make the choice to engage in that purchase, I have to ask myself not just whether the book is worth at least $0.99, but also whether the effort is worth a book that costs $0.99. I may be less likely to pay the full cost for a book with a $0.99 sales price for a book with a $10.00 price tag.

The perceived value of the book has to be greater than or equal to the perceived value of the full cost, monetary and otherwise. If I think it is, I'll buy it.

The question this raises for the self-publishing author, therefore, is “How do you make the buyer think your book is worth the full cost of purchase?”

2. More buyers doesn’t mean more profit

I want as many buyers as possible. After all, more readers means more profits. I’m going to sell my book at a very low price, but I’ll have a lot of readers and, therefore, will make a lot of money, right? Maybe not. Let’s do some math.

I sell 100 books at $1 during a one-week period. I now have 100 readers and have made $100. Ok, that’s not too bad. Now I lower the price to $0.50. During the next week, I sell 175 books. Yippie! I have 75 more readers this week than last week. The lower price resulted in more sales. That’s great! But wait a minute. I made only $87.50. I increased the number of readers, but I’m making less profit for all my hard work writing that book. That’s not good.

Here’s a real example. I have one e-book that I sell on Amazon for $0.99 (profit = $0.35 / book). If I sell 50 copies in a month, I make $17.50.

Low-cost book: 50 copies x $0.35 = $17.50

I have another e-book that I sell on Amazon for $9.95 (profit = $6.96 per book). I sell about 1 of this book for every 4 of the other book. Thus, if I sell 50 of the lower-cost book, I will likely sell 12 of this higher-priced book, for a profit of $83.52.

High-cost book: 12 copies x $6.96 = 83.52

Thus, I sell 38 more copies of the $0.99 book, but I make $66.02 more profit selling fewer copies of the higher-priced book.

Low-cost book: 50 copies, $17.50
High-cost book: 12 copies, $83.52

As we can see, more sales alone does not equal more profit. In fact, I would have to sell nearly 20 times more lower-cost books than higher-cost books for the profits to equal.

Here’s the issue. Higher prices generally mean fewer sales, though you get more profit from each sale, and lower prices generally mean more sales, though you get less profit from each sale.

Lower price: more sales, less profit per sale
Higher price: fewer sales, more profit per sale

When we think about this, we find that a price point exists where we maximize total profit. We don’t make the most sales (lowest price), and we don’t make the most profit per sale (highest price). But we do make the most money overall for our efforts. The following image shows how book price and sales volume interact.

We see from this graphic that if we have a high price, we have low sales quantity. If we have a low price, we have a high sales quantity. At some point, these two effects cross, giving us the perfect price for an e-book (or anything, for that matter).

From this image, we learn three things.

1. Price above the perfect price: We make more per book, but we sell fewer books, resulting in lower total profit.
2. Price below the perfect price: We make more sales, but we make less profit per book, resulting in lower total profits.
3. Perfect Price: The best price for an e-book is where we make the most total profit, not the most sales and or highest profit per book.

We can find this point by tracking profits and prices carefully. I can lower the price 10% and see how my profits change. Do my total profits increase when I lower the price? If so, I need to try lowering it a bit more. Do my total profits decrease? If so, I need to try raising the price.

There is a rather complex formula for determining the perfect price point, but this practical approach works well if applied over time. Eventually, I find the approximate price where I get the most profit for all my sales combined. (I’ll need to repeat this experiment in 6 months or in a year to make sure the price is still about right. Conditions do change in the market, which will affect that price point.)

The only time an author should sell his or her books below the perfect price point is when he or she wants to catch new readers who may later buy a higher-priced book. Otherwise, the author is only cheating him- or herself.

The question for the self-publishing author is not “How do you get the most readers?” The question is “Do you know what sales price will result in the most profit?”